The German stopped the clocks in 1m 23.380s, breaking his own pole lap record from 2013, and then watched on as neither Valtteri Bottas nor Lewis Hamilton could get within 0.4s of the benchmark.
Kimi Raikkonen was fourth in the second Ferrari, a couple of tenths back, after a puncture disrupted his runs on the ultrasoft tyre.
As the Scuderia hit the front, Red Bull struggled - local hero Daniel Ricciardo was beaten to fifth by Renault's Nico Hulkenberg, while Max Verstappen was languishing down in 12th without a quali run when the session was brought to an early close after Williams' Lance Stroll hit the wall at Turn 10.
Down at Sauber meanwhile Antonio Giovinazzi - drafted in to replace Pascal Wehrlein for the rest of the weekend - wound up 20th in what was his first ever Grand Prix outing.
The session itself started under an overcast sky, but Ferrari were quick to bolt on the ultrasofts and duly hit the front, Vettel edging Raikkonen by half a second after the pair's opening runs.
With Mercedes and the rest of the field delaying their switch onto the purple-marked tyre, top spot became an all-Ferrari duel. Raikkonen responded with a 1m 23.988s to pip Vettel by 0.001s, only for the German to respond by setting the fastest lap ever seen at Albert Park.
On his own ultrasoft run, Ricciardo managed a disappointing 1m 25.092s for sixth, leaving him trailing the impressive Hulkenberg by three hundredths of a second.
The Mercedes drivers switched to ultrasofts with 20 minutes remaining, but neither could deny Vettel. Bottas went second fastest on 1m 23.859s, 0.479s off Vettel, while Hamilton produced the best first sector of any driver but then saw his lap fall away, leaving him third overall. His 1m 23.870s was slower than he managed yesterday however, suggesting there is room for improvement.
Any hopes the Briton or the rest of the field had of responding were denied, however, when Stroll caught the wall and brought out red flags that lasted for the remainder of the session. The Canadian will require a gearbox change before qualifying - compounding an already difficult session for Williams in which Felipe Massa also struggled with brake problems.
The Brazilian wound up just outside the top 10, which was instead filled by Haas duo Romain Grosjean and Kevin Magnussen, in seventh and 10th respectively, and Toro Rosso team mates Carlos Sainz and Daniil Kvyat.
A great session for Ferrari then - posing some fascinating questions as we head towards the first qualifying session of F1's new era...
WATCH: FP3 highlights from Australia
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